No war, no peace: There are few winners in America’s trade war

Hostilities between the US and its trading partners have escalated sharply in the last two weeks. To help you make sense of the developing situation we’ve selected some of the best articles on this topic from America’s pre-eminent business news title – The Wall Street Journal.

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The Latest:

Casualties of the Trade War in the US are starting to appear. Harley-Davidson (HD) has announced plans to shift some of its production out of the US to dodge the European Union’s (EU) tariff hikes, which were made in retaliation to Trump’s taxes on EU-imported steel and aluminium. Trump – who in 2017 called HD a “true American icon” – said he was “surprised” it “would be the first to wave the White Flag”. With HD already relying more on its overseas market for sales, its latest defence looks to shake American workers the most as their jobs head overseas.

Trump had his own response to the EU’s tariffs, threatening to impose 20% tariffs on all European cars coming into the US. “Build them here!” he tweeted on Sunday.

Bringing manufacturing jobs back to the US was a linchpin of Trump’s campaign (more on that later), and in May European automakers were at pace to make around 1 million vehicles in the US this year. But Trump’s tariffs may have already put a dent in this figure, with casualties including Daimler AG, which told its workers that Chinese retaliatory import duties will affect sales and profits at its Alabama factory.

Manufacturing bodies around the globe have also said that tariffs on European-imported vehicles would lead to job losses in the US and divestment from US manufacturing, rather than the intended job-growth. The Alliance of Automobile Manufacturers, which represents a dozen automakers doing business in the US, said these tariffs are “not the right approach”.

While some German automakers support scrapping US-EU tariffs on cars altogether – including the EU’s 10% tax on US auto imports, and the US’s 25% tax on light trucks which has been in place since Lyndon Johnson’s administration. US Commerce Secretary Wilbur Ross suggested this may be the right approach: “If the EU were to reduce its 10% tariff on cars and trucks, that would be a positive step toward trade that was more fair and reciprocal.”

But America’s trade war is geared more towards China than anywhere else. Trump plans to bar Chinese companies from investing in US technology firms and block tech exports to Beijing, and last week he asked US Trade Representative Robert Lighthizer to identify a further $200 billion of Chinese goods to penalise. This follows the 10% tariffs he placed on $50 billion of Chinese goods. The Wall Street Journal (WSJ) points out: ‘A third round of tariffs would bring the total imports from China subject to US tariffs to $450 billion, almost as much as the $550 billion in goods that the US imported from China last year.’

Trump’s retort is also an attempt to counteract ‘Made in China 2025’ – Beijing’s industrial plan to become a tech superpower by increasing its domestically-made products such as robots, biopharmaceuticals and computer chips.

And he is not the only one to fret about China’s industrial and corporate ambitions. French President Emmanuel Macron has previously called for a unified European Union policy against Chinese corporate takeovers. While Trump’s trade adviser Peter Navarro said: “Everyone who trades with China faces this problem.” According to WSJ, China started the trade war long before Trump took action. China’s modus operandi seems translates to the ‘Made In China 2025’ initiative. Of 532 European companies working in China, 58% said they hadn’t been able to participate in ‘Made in China 2025’ initiatives, while 43% said the initiative was leading to added discrimination against foreign companies.

Past:

In order to fully understand the trade war it is important to look at why Trump is pushing the US in this direction. And it starts with his mandate.

On the campaign trail Trump maintained that he was the candidate for middle America because he would create more jobs for American workers. This is not unique – most politicians who challenge the incumbent do so by promising more jobs. What set Trump apart was the idea that rather than innovation and investment (the usual method by which politicians say they will create jobs), Trump vowed to put ‘America first’ and bring back millions of jobs that already existed but had moved offshore.

He argued that prior administrations’ weak trade policies had handed the farm to China, giving it a cost advantage and contributing to its becoming the world’s largest exporter. According to Trump, these policies culminated in Americans losing out with an $800 billion global goods deficit in the US last year (it was actually $566 billion, which is still its widest mark in nine years). In the same year, China’s trade surplus in goods with the US hit an unprecedented $275.8 billion, up 10% from the previous year. Hence Trump is intent on removing China’s cost advantage and creating incentives for Americans – not least in the Rust Belt states that elected him – to ‘Make in America’.

While Trump’s campaign rhetoric was focused on China, since taking office he has targeted all of America’s trading partners, including allies Mexico and Canada (albeit over the North American Free Trade Agreement). And he has done so using a simple (albeit inaccurate) measure: the relative deficit or surplus in trade with America. Broadly speaking, Trump argues any country that gets more than it spends in trading with the US is treating it unfairly.

The WSJ (and numerous others) have pointed out that this argument is false. For example, China’s trade surpluses are recycled to finance American borrowing, which keeps US interest rates low. Further, imposing tariffs on other nations is likely to impact prices for US consumers. Tariffs on industrial goods like aluminium are unlikely to reach the American consumer right away, but this may change as the discussion moves to consumer products such as cell phones, computers, apparel and cars. Hun Quach, vice president of international trade for the Retail Industry Leaders Association told WSJ: “of course [tariffs] are going to hit the products that you bring into your home every day”.

Future:

Within Trump’s inner circle is a pro-tariff administration that includes Peter Navarro. According to WSJ, Navarro and Trump both believe a ‘bipartisan elite sacrificed US interests for a misguided ideal, resulting in trade deficits and the erosion of American manufacturing.’

However, most others have noted that a full-blown Trade War will not only disrupt the US-China symbiosis of the last three decades, it will also have a potentially catastrophic impact on the global economy and negative consequences for Americans. No other manufacturing sector in the US creates as many jobs as the automotive manufacturing industry; Germany’s automakers and suppliers alone provide 116,500 jobs in the US. Imposing penalties on international automobile manufacturing bodies may leave the US isolated in a domestic market where car sales are already declining.

With the US isolating itself, other nation states are rebuking its trade policies and finding new allies. Disputes with the US have pushed China to pledge tighter coordination with Russia; America’s 11 erstwhile national partners have pushed on with the Trans-Pacific Partnership without the US; Canadian Prime Minister Justin Trudeau has announced retaliatory tariffs on US imports of aluminium and steel; India has imposed tariffs on $240m of US goods; and, according to WSJ, Mexico has vowed to impose retaliatory tariffs “up to an amount comparable to the level of damage” linked to US tariffs.

Fears that China might let the yuan weaken to gain a trade advantage were realised on Wednesday. China’s central bank sent the yuan tumbling to a six-month low against the US dollar. The ‘so-called fix’ devalued the yuan to its lowest point since December 2017. Brad Sester, a former economist at the US Treasury Department previously said it’s one of “the more aggressive options” China could take if the US goes ahead with tariffs.

All of this means that there are three risks now for the US. The first is that its trading partners group together and negotiate as a bloc, which would prevent the US from entering negotiations in a position of dominance. With China strengthening its ties with Japan and India, and setting up a working group with the EU to revamp the World Trade Organisation and counter US unilateralism, this doesn’t seem all that far off.

The second is that Trump gets what he wants, seeing through the mandate that thrust him to power. But rather than creating jobs, the primary result is an increase in the prices of products across the board in America (some domestic consumers are already spending more on products affected by US tariffs).

And last but not least, there is the risk that the trade war leads to the deterioration of global value chains and slows globalization, upending the slow and painful recovery that the world has finally made after the Global Financial Crisis.

Holly Bodeker-Smith for inkl